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Tax and Spend

A hallmark of the Bush era has been the systematic assault on government. The relentless removal of public dollars has not only crippled program after program, but the politics of permanent deficit has actually impaired the Democratic imagination. This was, of course, by design. The attack on the public sector now dates back 26 years to the beginning of the Reagan era and beyond, to Jimmy Carter's tepid support for government. It only very modestly reversed under Bill Clinton.

Meeting the deferred needs of this republic will take serious money. These needs include big-ticket items such as energy independence, early-childhood education, and restored investment in public infrastructure. But the premise that the federal cupboard is bare limits the Democrats to token outlays and renders big systemic reforms fiscally unthinkable.

As economist Henry Aaron of the Brookings Institution remarked, however, at a recent Economic Policy Institute (EPI) forum on budget politics, "There isn't any other long-term budget problem, aside from that emanating from the growth of health-care spending." He added that reforming Medicare is impossible without reforming the health-care system as a whole.

The way to big cost savings in health care would be, paradoxically, to move to universal coverage. That reform would cut so much waste and profiteering that it would allow the United States to gradually cut health-care costs from their current level of nearly 15 percent of the gross domestic product to something closer to the European average of 9 percent. But universal coverage would shift perhaps hundreds of billions of dollars of annual spending from the private sector into the federal budget. And if Democrats believe that such a scale of new public outlay is inconceivable, we will be left with a politics of chronic crisis, in which our overly privatized insurance system keeps shifting costs to consumers, cutting benefits, crippling Medicare, and inflicting uncompetitive costs on American industry.

I recently wrote in these pages of the excessive influence of Robert Rubin and kindred Wall Street Democrats, who commend budget balance as the top priority for Democrats. These budget hawks are wrong economically and wrong politically, wrong about the sources of the Clinton boom and wrong about the fiscal strategy needed in this decade. [See "Friendly Takeover," April 2007]

The Clinton boom had little to do with deficit reduction. The high growth of the 1990s resulted from rising productivity rates, due chiefly to computerization's effects on both manufacturing and services. As well, increased trade depressed industry's ability to raise prices and workers' ability to win higher wages, so the Federal Reserve concluded that higher growth need not be inflationary. The Fed's low interest rates stimulated a speculative boom. Budget balance was largely irrelevant.

An incoming Democratic administration in 2009 would face a fiscal situation similar to the one Clinton inherited in 1993: a large deficit resulting from Republican tax cuts for the rich, depleted social spending, and a weakening economy. Like Clinton, a new Democratic president would be counseled by Wall Street that budget discipline is paramount. A preview of that argument is in a recent paper ("Why Deficits Matter") by the Democratic Leadership Council. In it, economist Austan Goolsbee blasts Bush mainly for the size of the deficit, yet says next to nothing about its causes or uses (tax cuts for the rich, increased war spending, reduced social outlay).

But restored growth, distributed more equitably, is the cure for past debt. That in turn requires public investments. As Nobel laureate Joseph Stiglitz said at the same recent EPI forum, fiscal contraction could "risk the economy having a more significant slowdown." Stiglitz added: "There is a wide agenda facing our society, important priorities that need to be addressed that will require expenditures. And the value of spending has to be weighed against the cost of any deficit." With so much private "investment" going for repurchases of stock and rearrangements of corporate assets, public outlay today often produces more productivity gains than private investment does.

We definitely need to repeal Bush's tax cuts on the wealthiest, but we need that money to restore public programs to benefit Americans, not to balance the budget. The Prospect will be challenging the fiscal hawks on the Democratic center-right to an ongoing debate at www.prospect.org. Progressives and Democrats need to have this argument well before the 2008 election and blow away a lot of economic myths, so that the next Democratic president is not sandbagged, as Clinton was, by bond traders claiming that budget balance is necessary to appease Wall Street.